First Look

06 Nov 2018

Of special interest among new research papers, case studies, articles, and books released this week by Harvard Business School faculty:

Startup creates beauty products just for black women

Black women spend $7 billion per year on beauty products, yet many are dissatisfied with products that don’t work well with their skin tones. Steven S. Rogers and Alterrell Mills write a case study that follows two co-founders, both HBS alumnae, who raised over $1 million in startup funding to create a beauty company specifically for women of color.
Amanda and Kristen: Mented Cosmetics.

How gender diversity affects a firm's performance

Do firms with more gender diversity perform better? In studying 1,069 leading public firms in 35 countries and 24 industries, Letian Zhang finds that gender diversity has different effects on a company’s performance depending on how accepted gender diversity is in the firm’s country or industry.
An Institutional Approach to Gender Diversity and Firm Performance.

Bank lending shifts to smaller firms

Large banks that were affected by the tanking real estate market years ago began contracting their credit to small firms in the US. Therefore, since 2007, lending has been shifting in a big way to smaller firms, according to a working paper by Victoria Ivashina, Vitaly Bord, and Ryan D. Taliaferro.
Large Banks and Small Firm Lending.

A complete list of new research and publications from Harvard Business School faculty follows.

Abstract—We provide the first large-sample evidence on the behavior and impact of nonpracticing entities (NPEs) in the intellectual-property space. We find that, on average, NPEs appear to behave as opportunistic “patent trolls.” NPEs sue cash-rich firms and target cash in business segments unrelated to alleged infringement at essentially the same frequency as they target cash in segments related to alleged infringement. By contrast, cash is neither a key driver of intellectual-property lawsuits by practicing entities (e.g., IBM and Intel) nor of any other type of litigation against firms. We find further suggestive evidence of NPE opportunism: targeting of firms that have reduced ability to defend themselves, repeated assertions of lower-quality patents, increased assertion activity nearing patent expiration, and forum shopping. We find, moreover, that NPE litigation has a real negative impact on innovation at targeted firms: firms substantially reduce their innovative activity after settling with NPEs (or losing to them in court). Meanwhile, we neither find any markers of significant NPE pass-through to end innovators nor of a positive impact of NPEs on innovation in the industries in which they are most prevalent.

Abstract—How does a firm’s gender diversity affect its performance? Existing work has shown conflicting evidence—some finding a positive effect of gender diversity while others finding a null or a negative effect. However, most of the existing work has focused on a single industry or country and has not accounted for possible variation across social contexts. This paper advances an institutional framework and predicts that gender diversity’s effect on performance is determined by both its normative and regulatory acceptance in the broader institutional environment. Using a unique longitudinal sample of 1,069 leading public firms in 35 countries and 24 industries, I find that the effect of gender diversity on performance varies significantly across countries and industries due to differences in institutional contexts. The more gender diversity has been normatively accepted in a country or industry, the more it benefits a firm’s market valuation and revenue. These findings demonstrate the importance of the broader social contexts in shaping the consequences of gender diversity.

Abstract—We show that since 2007, there was a large and persistent shift in the composition of lenders to small firms. Large banks impacted by the real estate prices collapse systematically contracted their credit to all small firms throughout the United States. However, healthy banks expanded their operations and entered new banking markets. The market share gain of these banks was a standard deviation above the long-run historical market share growth and persists for years following the financial crisis. Despite this offsetting expansion, the net effect of the contraction in credit was negative, with lower aggregate credit and deposits growth as well as lower entrepreneurial activity through 2015.

Abstract—Foreign banks’ lending to firms in emerging market economies (EMEs) is large and denominated predominantly in U.S. dollars. This creates a direct connection between U.S. monetary policy and EME credit cycles. We estimate that over a typical U.S. monetary easing cycle, EME borrowers experience a 32-percentage-point greater increase in the volume of loans issued by foreign banks than do borrowers from developed markets, with a similarly large effect upon reversal of the U.S. monetary policy stance. This result is robust across different geographic regions and industries and holds for U.S. and non-U.S. lenders, including those with little direct exposure to the U.S. economy. Local EME lenders do not offset the foreign bank capital flows; thus, U.S. monetary policy affects credit conditions for EME firms. We show that the spillover is stronger in higher-yielding and more financially open markets and for firms with a higher reliance on foreign bank credit.

Abstract—We develop three novel measures of how much of the price impact of their trading different mutual funds internalize. We show that mutual funds that internalize more of their price impact hold larger cash buffers and use these buffers more aggressively to accommodate inflows and outflows. As a result, stocks held by these funds have lower volatility, and flows out of these funds have smaller spillover effects on other funds holding the same securities. Our results provide evidence of meaningful fire sale externalities in the mutual fund industry.

Abstract—We explore the implications of a subtle "default" choice that firms make in their regular reporting practices, namely that firms typically repeat what they most recently reported. Using the complete history of regular quarterly and annual filings by U.S. corporations from 1995 to 2014, we show that when firms make an active change in their reporting practices, this conveys an important signal about the firm. Changes to the language and construction of financial reports have strong implications for firms' future returns: a portfolio that shorts "changers" and buys "non-changers" earns up to 188 basis points per month (over 22% per year) in abnormal returns in the future. These reporting changes are concentrated in the management discussion (MD&A) section. Changes in language referring to the executive (CEO and CFO) team, or regarding litigation, are especially informative for future returns.

Abstract—The diffusion of salary information has important implications for labor markets, such as for wage discrimination policies and collective bargaining. Despite the widespread view that transmission of salary information is imperfect and unequal, there is little direct evidence on the magnitude and sources of these frictions. We conduct a field experiment with 752 employees at a multibillion-dollar corporation to address these questions. We provide evidence of significant frictions in how employees search for and share salary information and suggestive evidence that these frictions are due to privacy norms. We do not find any significant differences in information frictions between female and male employees.

Abstract—Many production processes are subject to inspection to ensure they meet quality, safety, and environmental standards imposed by companies and regulators. Inspection accuracy is critical to inspections being a useful input to assessing risks, allocating quality improvement resources, and making sourcing decisions. This paper examines how the scheduling of inspections risks introducing bias that erodes inspection quality by altering inspector stringency. In particular, we theorize that inspection results are affected by (a) the inspection outcomes at the inspector’s prior inspected establishment and (b) when the inspection occurs within an inspector’s daily schedule. Analyzing thousands of food safety inspections of restaurants and other food-handling establishments, we find that inspectors cite more violations after inspecting establishments that exhibited worse compliance or greater deterioration in compliance. Inspectors cite fewer violations in successive inspections throughout the day and when inspections risk prolonging their typical workday. Our estimates suggest that, if the outcome effects were amplified by 100% and the daily schedule effects were fully mitigated (that is, reduced by 100%), the increase in inspectors’ detection rates would result in their citing an average of 9.9% more violations. Understanding these biases can help managers develop alternative scheduling regimes that reduce bias in quality assessments in domains such as food safety, process quality, occupational safety, working conditions, and regulatory compliance.

Abstract—We consider the identification and estimation of demand systems in models of imperfect competition. Under standard assumptions about demand and supply, the bias that arises from price endogeneity can be resolved without the use of instruments. We provide a constructive identification result where the causal price parameter can be expressed as a function of the covariance of unobserved shocks. The function is estimated efficiently by the output of ordinary least squares regression. Thus, with a covariance restriction on unobservable shocks, structural parameters can be point identified. Further, it can be possible to place bounds on the structural parameters without imposing a covariance restriction. We illustrate the methodology with applications to ready-to-eat cereal, cement, and airlines.

Clever, a high-growth EdTech company based in San Francisco, had grown quickly in market share and headcount. As with many high-growth companies, however, early employees (many of whom had never managed people before) had been given the opportunity to manage teams, and they had done so with mixed success and consequences for both company success and employee retention. Reflecting on Clever’s progress as of early 2017, co-founder and CEO Tyler Bosmeny proposed investing in developing effective managers, such that others wanted to work for them and grow under them. Premised on the belief that providing high-quality feedback was a critical function of effective managers, he launched a Radical Candor initiative, based on tech veteran Kim Scott’s book "Radical Candor," that sought to develop managers by helping them master the art and science of developing others.

Black women, per capita, spend more money annually on beauty products than any other ethnic group. Despite the spend of over $7 billion per year, more than half of black women are dissatisfied with their purchases because they feel that the products are not made for their unique skin tones. In response to this unhappy and underserved market, two African American HBS alumnae created a beauty company with products specifically for Black and other women of color. This case study follows the two co-founders (black HBS alumnae) of a black-owned beauty startup and the unmet needs within the beauty industry. This case study examines the entrepreneurial opportunities that come from identifying an underserved market, specifically within the black community. Students learn approaches to product ideation/innovation, marketing strategies for the social media age, and launching a startup for a targeted audience. Students learn to analyze macro and micro economic data of an industry, synthesize consumer demographics and purchase behavior data, and create pro forma financial documents to determine the potential economic opportunity that is unmet in a market and the requisite fundraising to launch a new business. Mented co-founders became the 15th and 16th African-American women to raise over $1 million in startup funding.